The Anticipated Stock Market Correction Is Developing

Last month I wrote that the stock market was overvalued and that caution was warranted.

I reckon the anticipated correction started July 31st, a month or so sooner than I expected.

Recent price movement has done considerable technical damage to all indices and I do not think this is a “standard” pullback. Why, you may ask?

Based on Dow Theory interpretation we now have definite change in sentiment and in all likelihood the market is now in a short term bear trend, though the overall bull is still intact.

An analysis of today’s charts show that on both the Dow Industrials and the Dow Transports we have 2 lower highs and lower lows and a significant lower low has been violated on the Dow Industrials. It will take time to rectify this technical weakness. Yes there will be an “over-sold bounce” but I believe breakdown rather than consolidation will occur over the next few weeks based on the impulsive strength of last Thursday’s price action, therefore sell and keep your powder dry to buy back in when true consolidation has occurred.

Throughout Europe rumors on new bank “bail-ins” are spreading. On the 22nd July the Financial Times covered the following development regarding the Financial Stability Board:“Bank of England officials led by Mark Carney, the Bank of England governor, are attempting to bridge sharp differences among leading G20 countries as they prepare a landmark set of proposals aimed at tackling the problem of “too big to fail” banks according to the Financial Times today.
Talks under the auspices of the global Financial Stability Board (FSB) over the summer are approaching a key stage as officials aim to clinch an agreement on bail-ins and the bailing in of creditors including depositors of banks.
Finance officials are hoping to pave the way for proposals to be tabled at the G20 leaders meeting at the Brisbane summit in November.
The issue is of major consequence to globally systemic lenders such as Citigroup, Barclays and BNP Paribas, as some will have to issue billions of dollars of fresh bonds earmarked to carry losses.

The issue is of major consequence also to depositors who could see their savings confiscated as happened in Cyprus.
The complexity of the topic and differences between countries’ legal regimes and corporate structures are raising questions over how detailed any framework will be.
Japan is one of the countries with problems with bail-in plans amid concerns that they are not easily compatible with the structure of its banking system. Its banks are heavily deposit-funded, and officials are uncomfortable about the idea of bail-ins.

Japanese banks are already vulnerable and bail-ins could hurt consumer sentiment in the already struggling Japanese economy. Concerns in Tokyo are said to be sufficiently profound for it to push its case right up to the summit itself.

China is also skeptical about the notion of private sector bail-ins given its banks are state-owned. “There are some very entrenched positions,” one official told the FT.
Russia is likely to oppose the coming bail-in regime as well as many other large creditor nations.

Mr. Carney, who also chairs the FSB, said in March he wanted to “break the back” of the too big to fail issue this year. He said regulators sought by Brisbane to have cracked two major issues – on the loss absorbing capacity that big banks have to hold and on contractual provisions in derivatives contracts.”

Be under no illusion, bail-ins are coming to banks in the western world with consequences for depositors. This policy stance by the G20 will have significant implications for stock market sentiment in 2015 and beyond.

Mr. Quigley was born in 1958 in Dublin, Ireland. He holds a Bachelor Degree in Accounting and Management from Trinity College Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the stock market in 1989 in Belmont, California where he lived for 6 years. He has developed the Wealthbuilder investment and trading course over the last two decades as a result of research, study and experience. This system marries fundamental analysis with technical analysis and focuses on momentum, value and pension strategies.

Since 2007 Mr. Quigley has written over 80 articles which have been published on popular web sites based in California, New York, London and Dublin.

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